Can You Add Renovations to a Mortgage When Purchasing?

Residential mortgage loans typically are approved based on the appraised value and condition of the property being financed. Mortgage lenders generally require any renovations to be completed before a mortgage loan can be approved and closed. The Federal Housing Administration (FHA) 203(k) loan program provides an "all-in-one" mortgage loan for purchasing or refinancing a home and renovating it based on the property's appraised as-repaired value.

Advantages for Borrowers

FHA 203(k) mortgages eliminate the need for borrowing costly interim loans for acquiring and renovating a home before qualifying for a long-term mortgage. Consolidating property acquisition, renovation and long-term mortgage loans requires less time and avoids multiple loan applications. FHA borrowing requires a minimum down payment of 3.5 percent of the home's value as compared to 10 to 20 percent down for conventional mortgage loans. FHA mortgage programs have less stringent credit requirements than conventional mortgage loans. The FHA 203(k) program offers a convenient source of financing for borrowers purchasing foreclosed homes, including those owned by FHA's governing agency, the U.S. Department of Housing and Urban Development (HUD).

Property Eligibiliity

Properties eligible for FHA 203(k) loans include one-to-four family residential properties with some of the original foundation present. Existing properties and completed renovations can't exceed the maximum number of dwelling units allowed by zoning laws. Mixed-use properties can't include more than 25 percent non-residential use for a one-story structure, or more than 49 percent non-residential use for a two-story structure, or more than 33 percent non-residential use for a three-story structure. FHA 203(k) renovation funds only may be used for residential sections and access to the residential sections of mixed-use properties. Individual condos and their firewalls are eligible, but only interior repairs are permitted. Cooperative units are not eligible for FHA 203(k) loans. Manufactured homes are eligible for renovation under the FHA 203(k) program but are subject to specific requirements related to their foundations.

Allowable Renovations

In addition to renovations to a single-family home, renovation projects also may include increasing or reducing the number of living units. New construction must be attached to the existing structure, and the finished project must contain no more than four dwelling units. Dwellings with more than four units may be reduced to one to four dwelling units. For condominiums being renovated with 203(k) loans, the FHA requires that no more than five units within a complex can be undergoing renovation at one time.

Things to Know about FHA 203(k) Loans

The FHA works with its network of approved mortgage lenders for providing mortgage loans originated under FHA mortgage lending programs. FHA 203(k) funds for renovation are held in escrow by the mortgage lender until approved for release by an FHA property inspector. Borrowers of FHA loans are required to pay an up-front mortgage insurance premium at closing and also pay annual mortgage insurance premiums that are prorated monthly and added to monthly mortgage payments. Contact FHA-approved mortgage lenders for details about FHA 203(k) loans, mortgage quotes and for applying for an FHA 203(k) mortgage loan.